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International Trade Patterns and Balance of Payments

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This article provides short notes on International Trade Patterns and Balance of Payments.

The patterns of international trade facilitate in developing an overview about the types of products traded and the countries involved in trade. The shifts in trade patterns and their causes provide insights into the upheavals in the economic environment and trade policies of nations.

The macroeconomic factors in the trading countries as well as the overall world economic environment influence the international flow of goods and services. Thus, past international trade patterns reveal vital information about the macroeconomic environment and its changes. Besides, they provide a basic framework for country selection and evaluation for international business.

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International trade in India is traceable to 3000 BC since the Indus Valley period. Indian goods reached the markets of Mesopotamia, Egypt, Persia, and other parts of South East Asia (Exhibit 3.1). The Silk Road from Xian to Rome was connected to the eastern and western markets for regular trade and commerce.

Over the years, trade grew multi-fold, became global in nature, and got much more complex than earlier. Strides in science and technology, especially in transport and communication, contributed to its rapid growth.

This article of world trade and evaluates the trade patterns. About 30 economically advanced countries, consisting of only 15.3 per cent of the world’s population, contribute to 52 per cent of world’s GDP and account for 67.7 per cent of world’s export of goods and services whereas 143 developing countries with 84.7 per cent of the world’s population contribute to 48 per cent of world’s GDP and account for 32.9 per cent of the world’s export of goods and services.

World trade grew at almost double the rate compared to world output during the last decade (1997-2007), as depicted in Fig. 3.1.

Real merchandise exports were estimated to have grown by 5.5 per cent in 2007, almost three percentage points less than in 2006 but still close to the average rate of trade expansion over the last decade (1997-2007). The growth of real trade exceeded the real output growth by 2 percentage points. This reflects the increasing significance of international trade.

India’s exports grew remarkably in value terms from US$1,269 billion in 1950-51 to US$ 126.4 billion in 2006-07 but its share in the world exports declined considerably from 2.53 per cent in 1947 to 0.42 per cent in 1980. However, it rose gradually to 1 per cent by 2007

As a proportion of GDP, on balance of payment (BoP) basis, India’s exports consistently grew from 5.8 per cent in 1990—91 to 14 per cent in 2006—07, whereas the corresponding rise in imports was from 8.8 per cent in 1990-91 to 20.9 per cent in 2006-07 (Table 3.1).

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Trade deficits as a proportion of GDP, which had declined from 3 per cent in 1990-91 to 2.1 per cent in 2002-03, widened to 6.9 per cent in 2006-07 In 2004-05 and 2005-06, India’s imports increased rapidly and the trade deficit widened sharply, primarily due to the higher outgo on the import of petroleum products and the steep increase in its international prices.

It is estimated that an oil price increase of US$ 10 per barrel results in a deterioration of the trade balance of the oil importing developing countries by 1.2 per cent of GDP. India’s import cover of foreign exchange reserves increased from 2.5 months in 1990-91 to 16.9 months in 2003-04 but subsequently declined to 12.5 months in 2006-07.

This article elucidates the patterns of India’s international trade and evaluates the reasons for changes therein. The gains from international trade can be assessed by using the terms of trade. BoP, which reflects the summary of all economic transactions of the country during the specified period, has also been dealt with.